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4 Misconceptions about How Credit (and a Credit Score) Works

By Andy Hayes

While growing your wealth and savings in the long term is a key priority, almost all of us incur debts and deal with lenders along our wealth-building journey – whether that’s getting a car loan, a mortgage, or dealing with student loans.

Credit Scores are a frequent topic of conversation when it comes to lending – and unfortunately, the topic is filled with misunderstandings and misconceptions. Here are 4 common statements about credit (and credit scores) that are false – let’s unpack the facts about each one.

1. Changing your credit is a quick process. (Nope!)

I often hear people talking about improving their credit score, as if it’s just logging into a website somewhere and pushing a few buttons or making a photo call to your credit card company. Unfortunately, improving your credit doesn’t work like that – even if you do make fixes to mistakes on a credit report, it can take weeks or months for your actual credit score to change.

But the data that is the most meaningful to lenders and banks is the data that requires time to accumulate – for example, number of on time payments for a student loan, or months you’ve held a credit card with no late payments. You can’t rush improving your credit score.

2. Checking your credit score is a bad idea. (Nope!)

This is a huge misconception, because it is true that numerous inquiries on a credit file can influence a credit decision by a lender. However, you checking your credit regularly (quarterly, for example) to monitor your work to improve your score and fix mistakes, etc. is not going to influence your score.

What influences your score negatively is multiple lenders checking a credit file, making the impressing that, for example, you’re trying to open multiple credit cards at once, or overextend yourself with loans from different lenders.

Here’s the thing: your credit file is yours. You have a right, as by law, to see it. Do not worry about checking your credit score, as long as you are not obsessing over it every week or month (see previous item.)

3. My credit score can affect my ability to get a job. (Nope!)

While so many millenials are going the freelance/entrepreneurial route, corporations are still asking for credit history on potential applicants. The purpose of this is to perform a background check on applicants, not to discriminate. It is illegal for a company to use a credit score as a hiring determination, and they must have your permission to pull your credit – so you can say no, although you might find this reflects unfavorable in the hiring process.

When in doubt, ask your potential employer to explain what they are looking for in your credit file. If you approach the topic from a place of education (please help me understand this process so I feel empowered) and NOT in a fearful tone (which implies you have something to hide), you will have nothing to worry about.

4. XYZ score is bad, ABC score is good. (Nope!)

Lastly, I want to encourage you to not look at your credit score in terms of good or bad. (Your credit report might even have a little colored bar, telling you if your score is green, yellow, or worse, red.)

The bottom line is that you should always want your score to be better than it is, and you should take the time to understand why your score is where it is, and what you could do to improve it. For example, many millenials do not have “high” credit scores because they do not have a history of making credit payments, but do have high student loan balances. For someone like this, simply starting to pay their loan payments on time when they come due will trigger an increase in a credit score.

The other side of this coin is to consider what you need a “high” credit score for right now? If you aren’t planning on getting financing to buy a car or buy a house, or any other kind of loan, then you have some time to work on it.

Think of credit as a long term process, much like the process of building wealth and savings. It’s not going to change overnight.